The World Has Gone Mad…
I thought it might be helpful if I shared my thoughts on what’s going on in the world and how that’s been affecting your money recently. Certainly these are worrying times and I completely understand if you have concerns.
Hopefully, the chart below will give you some context and, perhaps, some peace of mind. Every time we go through a crisis, we tend to feel ‘it’s different this time’. I’m not saying it’s not different each time but, to me, it’s all about context:
Whether you do or whether you don’t, I’m sure you’ll be aware of the tension of the dreaded penalty shootout. According to research, around 49% of keepers dived to the left, 44% went right and 7% stayed in the middle. The same research saw that 40% of penalty kicks were hit straight down the middle, with roughly 30% each going left or right.
Therefore, if they were playing for statistical advantage, a goalkeeper should stand in the middle and not dive at all. But almost none do. This has been explained as ‘action bias’, where we want to be SEEN to be doing something, anything at all, even though we know that it’s often better to do nothing.
Imagine the fans and the coach’s reaction to the goalkeeper if they simply stood in the middle and didn’t make a heroic dive in an attempt (usually a failed one) to save the shot?
Despite the weight of evidence against it, we’re conditioned to prefer ‘action’ to ‘inaction’.
Fight or Flight?
The same ‘blind spot’ can mislead us into acting when it comes to investing during volatile periods. Whether it’s Brexit, the pandemic, war in Eastern Europe, energy prices or inflation, the continual flow of depressing news, followed by periods of market volatility, unleashes an urge to do something, just to avoid doing nothing!
This primaeval desire comes from the ‘fight or flight’ mentality which forms part of human DNA. For as long as our species has existed, we learn that, if we sense danger, we should be prepared to act, either run away or stand and fight.
No Crystal Ball
In March 2020, at the height of COVID, a well-known wealth management firm advised their clients that ‘this time it’s different’ and they should move their money to a ‘low-risk portfolio’. After the flash crash happened, this advice cost clients 30% in lost investment returns and had a negative impact on many investors’ retirement plans.
A more recent case was an article in the Daily Mail on 24th February 2022, recommending investors sell 50% of their portfolio and hold cash instead. On the face of it, with the Russian invasion of Ukraine and multiple other challenges facing the global economy, perhaps a reasonable suggestion.
However, the historical data confirms that this is likely to be a bad move. Looking at the worst 48-day periods since 1928, the returns when tracked through to the year-end were positive almost every year. In other words, investors would have been better off staying put – doing nothing.
Not Much of a Choice!
If you’re inclined, despite what I’ve just said, to move things to cash, that’s hardly a ‘safe’ option either. If you think about the rate of interest you’d get on your cash versus inflation, you’re guaranteeing a loss! Cash doesn’t mean LOW-RISK, in fact, given that you’re guaranteeing a loss, it could be argued that cash is quite a HIGH-RISK strategy in the long-term.
I’m Here if You Need Me
Regardless of what I’ve said here, I’m not expecting you to say ‘thanks Marco, I’m no longer concerned’. Of course you’re going to continue to watch the news and feel uneasy about things. It’s natural. That said, I want you to know that I’m here for you and happy to discuss things with you if you feel that would be useful.
Speak soon…